BOJ holds off fresh stimulus, says economy recovering

TOKYO--The Bank of Japan (BOJ) on Tuesday held off expanding its vast stimulus program, saying the world's number three economy was recovering despite activity taking a hit from April's sales tax hike.

However, policymakers slightly lowered the economic growth forecast for the current fiscal year as they issued their unanimous decision following a two-day policy meeting.

The yen hardly moved on the announcement, with the dollar fetching 101.57 yen against 101.54 yen in New York Monday afternoon

“Japan's economy has continued to recover moderately as a trend, although the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike has been observed,” the central bank said in a statement.

“With regard to the outlook, Japan's economy is expected to continue its moderate recovery trend, and the effects of ... the consumption tax hike are expected to wane gradually,” it added.

Many economists still believe the BOJ will expand its monetary base this year.

“It came as no surprise that the BOJ left policy settings unchanged today and presented upbeat inflation forecasts, but we still think more easing will be announced in October,” said Marcel Thieliant from Capital Economics.

The median predictions for economic growth presented by board members was virtually unchanged and core inflation forecasts were broadly in line with the BOJ's 2.0-percent inflation target both in fiscal 2015 and 2016, he noted.

The bank slightly lowered its growth forecast for the current fiscal year to March to 1.0 percent expansion, from a previous 1.1 percent forecast.

But Thieliant said “these predictions may assume an extension” of the current stimulus package.

“It should not be surprising that policymakers express confidence in their own strategy. What's more, recent comments by governor Kuroda revealed that the central bank is only 'half way there'” in beating years of deflation.

“The upshot is that further policy easing is still likely to be required, and we expect an extension ... into 2015 to be announced at the late-October meeting.”

Credit Suisse said in a research note: “We maintain our view that the bank will be forced to downgrade its economic and inflation forecast by October and we continue to expect the policy board to decide on additional easing during the October-December quarter.”

The BOJ's April-June Tankan survey showed Japanese business confidence sagged for the first time in six quarters owing to the April 1 sales tax hike, which hitting consumer demand.

The economy had been on the upswing as Abe's growth blitz, dubbed Abenomics, helped sharply weaken the yen, giving a lift to exporters' profitability and driving a stock market rally last year.

But the tax rise — seen as crucial to taming Japan's massive national debt — threatened to derail those plans and stoked speculation the BOJ would be forced to act.